The increasing number of startup companies that offer new or reimagined services to the payroll community seem to cross all aspects of payroll operations, creating new niches in maximizing workforce management processes and streamlining pay delivery.
Billions of dollars of funding from venture capitalists made this possible. Why is this rush for investment in new and innovative solutions occurring, and how is this influx of funding affecting the future of the payroll function? There are several factors that are aligning.
First, payroll services are seen as fertile territory for significant investment with the expectation of success. According to financial technology investment guru Alexandre Lazarow, Managing Partner of Fluent Ventures and Author of Out-Innovate, “successful fintechs leverage at least one of the 3Ds: distribution, data and delivery. Payroll and HR workforce management startups have the potential to benefit from these, with a pre-existing relationship with the customer, leverageable data on employment and an ability to delight customers with a seamless integration.”
Second, there is an opening in the payroll services arena that allows for new approaches and processes that are gaining traction in a market generally dominated by larger providers. Look no further than coverage of the latest global payroll survey from Ernst and Young for why startup payroll and employment-based solutions are proliferating. The EY report on the survey said that respondents continue to indicate “that one provider can’t handle all their needs.” This recognition that payroll and HR service providers may never offer a “one-size fits all” total solution means there is space in the market for the development of applications to aid in the payroll process.
Compatibility
On the surface, the decentralized nature of many startups seems to run counter to conventional wisdom in global payroll planning that capturing the entire picture of a global workforce on one system is critical to the success of managing the operation. However, many of these startups developed technology compatible with the larger, more established general programs, so their pieces of the process can be fully integrated and consolidated into broader applications...at least conceivably.
As employers struggle to get the optimum mix of payroll providers, as well as the right combination of in-house and outsourced solutions to serve their needs, these interfaces, also known as APIs, are everywhere now, helping smooth integrations of the latest payroll tools.
The advantage for the newer operators is their specific core competency — something that larger service providers offering a range of solutions for processing pay, for example, generally cannot claim, even if they attempt to develop, license, or coopt their own versions.
By creating compatibility, startups can pitch the “powered by” moniker so other service providers can blend in the application in conjunction with their other offerings for a more complete suite to present to clients, all while the developing startup company retains its core.
The Employment Dilemma
Not to be discounted as a factor for investing in newer payroll and HR applications is the change in the employment environment that employers are scrambling to address.
Increased attention to assure the pay experience is a positive one goes beyond simply recognizing employees can leave when they do not get paid correctly or will not apply to a job if certain pay benefits are not made available.
Payroll has always been a key to employee financial wellness, but a new emphasis in what else an employer can do to minimize employee financial stress has given rise to new approaches, many developed by startups with the funding by venture capitalists that are impacting payroll.
There is more interest in investing in employee payment-related startups because the mechanisms developed to make transactions at a store, or online, and the user interfaces as friction-free as possible are adaptable and are moving into the payroll delivery world. From high-tech chatbots using AI, to gamification features that make the experience of checking pay status more fluid and pleasant, to microsaving options, these applications are enhancing the employee experience, driving increased retention and helping with recruitment.
What’s Next
Venture capital is the fuel behind much of payroll’s recent technological innovation and new applications that are fast becoming standards in the payroll process. Look no further than the increased adoption of earned wage access, or on-demand pay, as well as the employer-of-record approach to facilitating multi-country employment.
These two areas alone disrupt the payroll status quo and are becoming more acceptable in the market. Between them, firms with these offerings have garnered billions of dollars in investment. With maturation of the programs, more startups jump on board to carve their own niches with sometimes newer, often similar, applications.
This should continue so long as there are qualified tools being developed show a benefit to the community and success for investors.
Note that the significant investment in companies offering the employer-of-record method to manage the complex global payroll management puzzle demonstrates that new methods, or techniques, can be just as important as the technology driving the programs themselves.
Adoption Considerations
Determining which innovation will be successful is always challenging. The overlying quandary facing employers confronting these new startup programs is weighing the possible cost of delaying acceptance against the cost of adopting a new program that may not be fully proven in the environment.
Payroll in general is not an appropriate function to take inordinate chances, so the assessments of early adopters are critical.
One consideration with new applications, be they based on new tech tools or on adopting existing technology through a different technique, is the rush-to-market syndrome. This occurs when a developing organization, in its quest for proof of concept in the real world, releases an application to the public that may not be fully vetted for operational, compliance or other aspects, causing hurdles on the path to full adoption.
Another challenge is that applying any truly new program may be difficult to get an apples-to-apples comparison. Providers offering services often do not neatly line up against one another. This means, unfortunately, clients must rely on the providers of the services who are most familiar with their value proposition to guide their assessment for return on investment and compliance.
One other consideration is the question of whether the startup can successfully scale its programs out to large populations, or, on the other hand, are they able to effectively service one-off, long tail situations.
The Regulatory Environment
As new tools for payroll become established, how the regulators will address them is critical to continued success. New technology sometimes does not fit into the established regime of laws and regulations, and it is certain that appropriate governmental oversight will lag when very new and innovative products and services come to market.
But payroll data is very sensitive, so watchdogs for data privacy, consumer protection, and data security will be keen on assuring these applications cause no harm and break no laws. Those investing in advancements in payroll services are aware of this, but they, too, can struggle in knowing all pieces of a program are validated for compliance purposes. Governments can shut operations down and force changes in business models.
Yet the authorities also have a competing purpose in that they want to foster innovation, investment, and support new and better ways to improve the economy. As this can come in conflict with the regulatory regimes, it is likely these laws will need to change to recognize and validate approaches so organizations are freer to operate and supply the new tools for payroll.
Finally, it’s important to note that governments will apply innovative tech on their own to test and flesh out these applications coming to the market. New reports from employers (or their service providers) may need to be developed and filed so effective monitoring can occur. There likely will be more activity in this regard than looking the other way as progress continues.
Life-Cycle Considerations
Expect the near future of many of these developing firms generally to fall into more like-with-like consolidation as the markets for their services expand. Some will be absorbed by larger organizations, some will merge, some will become a branded service subsidiary to a larger provider, and several will run out of money and fail.
There will be other developers with innovative practices and tools that can apply to payroll, however, those that have the attributes to attract significant investment.
This changing of the landscape of the payroll function driven by venture capital likely will result in disruption to the current ways of managing the payroll function well into the future.
As the famous quote from All the President’s Men says: “Follow the money.” The Global Payroll Association will continue to track these developments.
Author: Michael Baer
Michael Baer is a trusted thought leader and innovative global information services developer. His most recent role was as a special advisor with DailyPay and, prior to that, he was managing editor overseeing domestic and international payroll news and analysis with Bloomberg Tax (previously BNA). Michael gained experience in payroll and human resources with Marriott and was later the personnel manager for the Shanghai Hilton.
The increasing number of startup companies that offer new or reimagined services to the payroll community seem to cross all aspects of payroll operations, creating new niches in maximizing workforce management processes and streamlining pay delivery.
Billions of dollars of funding from venture capitalists made this possible. Why is this rush for investment in new and innovative solutions occurring, and how is this influx of funding affecting the future of the payroll function? There are several factors that are aligning.
First, payroll services are seen as fertile territory for significant investment with the expectation of success. According to financial technology investment guru Alexandre Lazarow, Managing Partner of Fluent Ventures and Author of Out-Innovate, “successful fintechs leverage at least one of the 3Ds: distribution, data and delivery. Payroll and HR workforce management startups have the potential to benefit from these, with a pre-existing relationship with the customer, leverageable data on employment and an ability to delight customers with a seamless integration.”
Second, there is an opening in the payroll services arena that allows for new approaches and processes that are gaining traction in a market generally dominated by larger providers. Look no further than coverage of the latest global payroll survey from Ernst and Young for why startup payroll and employment-based solutions are proliferating. The EY report on the survey said that respondents continue to indicate “that one provider can’t handle all their needs.” This recognition that payroll and HR service providers may never offer a “one-size fits all” total solution means there is space in the market for the development of applications to aid in the payroll process.
Compatibility
On the surface, the decentralized nature of many startups seems to run counter to conventional wisdom in global payroll planning that capturing the entire picture of a global workforce on one system is critical to the success of managing the operation. However, many of these startups developed technology compatible with the larger, more established general programs, so their pieces of the process can be fully integrated and consolidated into broader applications...at least conceivably.
As employers struggle to get the optimum mix of payroll providers, as well as the right combination of in-house and outsourced solutions to serve their needs, these interfaces, also known as APIs, are everywhere now, helping smooth integrations of the latest payroll tools.
The advantage for the newer operators is their specific core competency — something that larger service providers offering a range of solutions for processing pay, for example, generally cannot claim, even if they attempt to develop, license, or coopt their own versions.
By creating compatibility, startups can pitch the “powered by” moniker so other service providers can blend in the application in conjunction with their other offerings for a more complete suite to present to clients, all while the developing startup company retains its core.
The Employment Dilemma
Not to be discounted as a factor for investing in newer payroll and HR applications is the change in the employment environment that employers are scrambling to address.
Increased attention to assure the pay experience is a positive one goes beyond simply recognizing employees can leave when they do not get paid correctly or will not apply to a job if certain pay benefits are not made available.
Payroll has always been a key to employee financial wellness, but a new emphasis in what else an employer can do to minimize employee financial stress has given rise to new approaches, many developed by startups with the funding by venture capitalists that are impacting payroll.
There is more interest in investing in employee payment-related startups because the mechanisms developed to make transactions at a store, or online, and the user interfaces as friction-free as possible are adaptable and are moving into the payroll delivery world. From high-tech chatbots using AI, to gamification features that make the experience of checking pay status more fluid and pleasant, to microsaving options, these applications are enhancing the employee experience, driving increased retention and helping with recruitment.
What’s Next
Venture capital is the fuel behind much of payroll’s recent technological innovation and new applications that are fast becoming standards in the payroll process. Look no further than the increased adoption of earned wage access, or on-demand pay, as well as the employer-of-record approach to facilitating multi-country employment.
These two areas alone disrupt the payroll status quo and are becoming more acceptable in the market. Between them, firms with these offerings have garnered billions of dollars in investment. With maturation of the programs, more startups jump on board to carve their own niches with sometimes newer, often similar, applications.
This should continue so long as there are qualified tools being developed show a benefit to the community and success for investors.
Note that the significant investment in companies offering the employer-of-record method to manage the complex global payroll management puzzle demonstrates that new methods, or techniques, can be just as important as the technology driving the programs themselves.
Adoption Considerations
Determining which innovation will be successful is always challenging. The overlying quandary facing employers confronting these new startup programs is weighing the possible cost of delaying acceptance against the cost of adopting a new program that may not be fully proven in the environment.
Payroll in general is not an appropriate function to take inordinate chances, so the assessments of early adopters are critical.
One consideration with new applications, be they based on new tech tools or on adopting existing technology through a different technique, is the rush-to-market syndrome. This occurs when a developing organization, in its quest for proof of concept in the real world, releases an application to the public that may not be fully vetted for operational, compliance or other aspects, causing hurdles on the path to full adoption.
Another challenge is that applying any truly new program may be difficult to get an apples-to-apples comparison. Providers offering services often do not neatly line up against one another. This means, unfortunately, clients must rely on the providers of the services who are most familiar with their value proposition to guide their assessment for return on investment and compliance.
One other consideration is the question of whether the startup can successfully scale its programs out to large populations, or, on the other hand, are they able to effectively service one-off, long tail situations.
The Regulatory Environment
As new tools for payroll become established, how the regulators will address them is critical to continued success. New technology sometimes does not fit into the established regime of laws and regulations, and it is certain that appropriate governmental oversight will lag when very new and innovative products and services come to market.
But payroll data is very sensitive, so watchdogs for data privacy, consumer protection, and data security will be keen on assuring these applications cause no harm and break no laws. Those investing in advancements in payroll services are aware of this, but they, too, can struggle in knowing all pieces of a program are validated for compliance purposes. Governments can shut operations down and force changes in business models.
Yet the authorities also have a competing purpose in that they want to foster innovation, investment, and support new and better ways to improve the economy. As this can come in conflict with the regulatory regimes, it is likely these laws will need to change to recognize and validate approaches so organizations are freer to operate and supply the new tools for payroll.
Finally, it’s important to note that governments will apply innovative tech on their own to test and flesh out these applications coming to the market. New reports from employers (or their service providers) may need to be developed and filed so effective monitoring can occur. There likely will be more activity in this regard than looking the other way as progress continues.
Life-Cycle Considerations
Expect the near future of many of these developing firms generally to fall into more like-with-like consolidation as the markets for their services expand. Some will be absorbed by larger organizations, some will merge, some will become a branded service subsidiary to a larger provider, and several will run out of money and fail.
There will be other developers with innovative practices and tools that can apply to payroll, however, those that have the attributes to attract significant investment.
This changing of the landscape of the payroll function driven by venture capital likely will result in disruption to the current ways of managing the payroll function well into the future.
As the famous quote from All the President’s Men says: “Follow the money.” The Global Payroll Association will continue to track these developments.
Author: Michael Baer
Michael Baer is a trusted thought leader and innovative global information services developer. His most recent role was as a special advisor with DailyPay and, prior to that, he was managing editor overseeing domestic and international payroll news and analysis with Bloomberg Tax (previously BNA). Michael gained experience in payroll and human resources with Marriott and was later the personnel manager for the Shanghai Hilton.